Tariffs
Though an attempt is being made to present the concept in a favorable light, tariffs must be judged by their record. Free and open trade has Biblical roots and is mutually and highly beneficial in many respects, but ‘Protectionism’, a national trade policy seeking to protect domestic manufacturers by imposing tariffs on the imports of foreign producers, grows from the destructive root of subsidization. Voluntary subsidy wastes precious capital, feeds apathy, encourages substandard performance, and stifles creativity and effort. Tying one arm of a superior boxer behind his back is neither a noble, nor a fruitful solution for the inferior boxer, who might otherwise have learned from the beating. What is the record on tariffs and why, as investors, should we think about it?
The long record of tariffs proves that after subsidizing uncompetitive domestic manufacturers, tariffs increase prices, reduce employment, interfere with free-market supply-demand dynamics, and antagonize trading partners (Frederic Bastiat famously recognized that “when goods don’t cross borders, soldiers will”). The record on tariffs is so universally dismal that many on both sides of the aisle understand “A trade war has no winners”. Consider the facts:
The nation against which a tariff is applied doesn’t actually pay the tariff, consumers of imported products do in the form of higher prices. A Howard Marks study of President Obama’s 2011 tire tariffs revealed Americans were forced to spend $1.1 billion more on tires to preserve 1,200 domestic jobs, an average cost of $1 million per job, each of which paid $40,000. Marks cited similar results from a study of steel tariffs imposed by President Bush in 2002.¹ Tariffs represent a tax on Americans.
The Smoot-Hawley Tariff Act of 1930 triggered the most prominent trade war of the 20'th century. The retaliatory tariffs on U.S. goods caused a 61% plunge in exports by 1933, and a repeal of Smoot-Hawley in 1934. There is widespread agreement among historians and economists the Smoot-Hawley Act and its associated trade war amplified and prolonged the agonies of The Great Depression.²
Trade wars produce extensive uncertainty in the global business environment. What company wants to risk capital in a hostile nation that might over-tax its products or nationalize its assets?
President Trump’s tariffs introduce a significant new uncertainty to an expensive stock market and are capable of stoking inflation, ushering in a bear market recession, and/or inciting new military conflicts. It’s noteworthy the President wants lower interest rates, yet imposes inflationary tariffs which may force the Fed to increase rates. It’s also mentionable our Commander in Chief understands tax cuts are good because people and businesses generally make wiser financial decisions than the government, resulting in increased production, jobs, and economic growth, which in turn provides more revenue for the government, yet puzzling he fails to see that government taxes in the form of tariffs won't produce opposite results.
At minimum we should expect increased volatility in 2025 as a result of the new dynamic.
Think about it, Shaun.
"So Hiram supplied the cedars and evergreens Solomon needed, and Solomon supplied Hiram annually with 20,000 cors of wheat and 20,000 baths of pure olive oil. So the Lord gave Solomon wisdom, and Hiram and Solomon were at peace and made a treaty." ~ 1 Kings 5:10-12
1 Howard Marks, "Political Reality Meets Economic Reality", Memo to Oaktree Clients, January 2019
2 Foundation for Economic Education, “The catastrophic results of the Smoot-Hawley Tariff Act of 1929-1930”, December 10, 2016
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